Toshiba Corp faces loss of 'billions' on US nuclear acquisition

28 December 2016

Toshiba Corp may have to write off "several billion" dollars because of Westinghouse Electric Company's purchase a year ago of CB&I Stone & Webster (S&W) - a US construction firm that specializes in nuclear power projects. In a statement yesterday, the Japanese electronics conglomerate said it needs to "determine the value" of the possible Westinghouse loss and the impact on Toshiba's financial forecast for 2016 announced last month.

Toshiba bought Westinghouse in 2006 for about $5.4 billion. In 2015, Westinghouse entered into a purchase agreement to acquire 100% of the shares of S&W from Chicago Bridge & Iron Company (CB&I) for $229 million, and the transaction closed in December that year. Announcement of completion of the acquisition on 5 January this year explained that the amount of goodwill would be finalised by 31 December, in accordance with US GAAP, or Generally Accepted Accounting Principles. Goodwill is the premium an acquirer pays over the value of a company's tangible assets, such as factories and equipment.

At the time, the estimate of the goodwill resulting from the transaction was about $87 million, which was a preliminary determination and subject to change.

Toshiba said yesterday that as the 31 December deadline draws near, "the possibility has been found that the goodwill will reach a level of several 100 billion yen or several billion US dollars", resulting in a negative impact on its financial results due to impairment of all or part of the goodwill.

AP1000 contracts

Westinghouse is constructing eight AP1000 pressurized water reactors - four in the USA and four in China - with S&W as its consortium partner.

Under the agreement with CB&I announced in October last year, Westinghouse acquired the business of engineering, construction, procurement, management, design, installation and commissioning of nuclear power plants, including the VC Summer project in South Carolina, the Vogtle project in Georgia, as well as projects in China. Westinghouse, also acquired CB&I's nuclear integrated services business, which includes small capital projects for existing US nuclear plants. The purchase included 11 facilities in the USA and Asia.

Upon closing of the transaction, Westinghouse assumed full responsibility for all AP1000 projects and the nuclear integrated services business. Since then, Toshiba and CB&I - S&W’s former parent company - have been in dispute over the business's true value.

Toshiba and CB&I announced in May this year they had agreed to terminate a number of agreements originally signed between Shaw Group and Toshiba related to construction of two Advanced Boiling Water Reactors (ABWRs) at the South Texas Project (STP). Since the agreements were signed in 2010, Shaw was acquired by CB&I.

In November 2010, Shaw Group and Toshiba announced a global strategic partnership giving Shaw exclusive rights to provide engineering, procurement and construction (EPC) services for Toshiba ABWRs, including a contract for the planned STP reactors. Through that agreement, Shaw was to become the exclusive EPC contractor for Toshiba ABWRs in all countries except Japan and Vietnam for the next 20 years. Shaw and its affiliate, Stone & Webster, was acquired by CB&I in 2013.

Toshiba said in May it recognizes that, following the sale of its S&W unit, CB&I's business strategy is "now focused on sectors other than nuclear new build projects". As a result, it has reached agreement with CB&I to terminate the earlier agreements related to construction of ABWRs.

Toshiba said yesterday that Westinghouse, in accordance with US GAAP, "has been engaged in purchase accounting and studying the actual status based on materials provided by S&W and others after the transaction completion". It added: "In this process, Westinghouse is evaluating the cost to complete the AP1000 contracts in order to measure the fair value of acquired assets and liabilities," it added.

Westinghouse has found that the cost to complete the US projects "will far surpass the original estimates, mainly due to increases in key project parameters, resulting in far lower asset value than originally determined, leading to a possible recognition of goodwill far exceeding the original December 2015 estimate of $87 million", Toshiba said.

Both the Vogtle and Summer projects have been beset with delays and cost overruns.

Construction of the two Westinghouse AP1000s at Vogtle, near Waynesboro, began in 2013. Vogtle 3 is scheduled to start operations in 2019 and unit 4 in 2020. Two pressurised water reactors are already in operation at the site.

Georgia Power announced last month that the reactor pressure vessel (RPV) had been lifted into place at Vogtle 3 - two days after the placement of the CA01 module was completed at Vogtle 4.

Two AP1000s are also being built at VC Summer for Scana Corporation subsidiary South Carolina Electricity and Gas and co-owner Santee Cooper. Westinghouse is the contractor, and Fluor is the construction manager.

Construction began on both units in 2013, with unit 2 expected to enter operations in 2019 and unit 3 in 2020. Summer 2's CA01 module was installed in July 2015 and its RPV in August this year. Summer 3's CA01 module was placed this month.

Following his appointment as Toshiba's new CEO this year, Satoshi Tsunakawa reaffirmed the company's commitment to nuclear power, saying in June that its goal of building 45 nuclear reactors around the world by the 2030 financial year was achievable.